TY - JOUR
AU - Steinsson,Jón
TI - The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13910
PY - 2008
Y2 - April 2008
DO - 10.3386/w13910
UR - http://www.nber.org/papers/w13910
L1 - http://www.nber.org/papers/w13910.pdf
N1 - Author contact info:
Jón Steinsson
Department of Economics
Columbia University
1026 International Affairs Building
420 West 118th Street
New York, NY 10027
Tel: 212/854-3690
Fax: 212/854-8059
E-Mail: jsteinsson@columbia.edu
AB - Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies. This fact can help explain why existing sticky-price business cycle models have been unable to match the persistence of the real exchange rate. The recent literature has focused on models driven by monetary shocks. These models yield monotonic impulse responses for the real exchange rate. It is extremely difficult for models that have this feature to match the empirical persistence of the real exchange rate. I show that in response to a number of different real shocks a two-country sticky-price business cycle model yields hump-shaped dynamics for the real exchange rate. The hump-shaped dynamics generated by the model are a powerful source of endogenous persistence that allows the model to match the long half-life of the real exchange rate.
ER -